Saturday, Mar 29, 2008
One to watch
Newsnight: Housing in meltdown
Here it is if you missed yesterday's Newsnight on BBC2
Posted by yoyo1 @ 08:29 AM (2153 views) Add Comment
31 Comments
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1. yoyo1 said...
I take that back- here it isn't!
Is anyone able to post the link for last nights programme?
2. confused76 said...
Try this
http://news.bbc.co.uk/player/nol/newsid_4670000/newsid_4679900/4679986.stm?bw=nb&mp=wm&0,location=0,status&news=1&0,resizable=0,width&0,menubar=0,scrollbars&681,heigh=&bbcws=1
also relevant
http://www.bbc.co.uk/blogs/newsnight/2008/03/friday_28_march_2008.html
http://www.bbc.co.uk/blogs/newsnight/2007/05/do_we_need_a_housing_market_crash.html
3. yoyo1 said...
Thanks c76... what it is to be clever!
4. Jacket said...
You can watch it on the BBC iPlayer here:
http://www.bbc.co.uk/iplayer/page/item/b009ny9v.shtml?filter=txdate%3A28-03&filter=txslot%3Aevening&start=1&scope=iplayerlast7days&version_pid=b009ny98
5. confused76 said...
yoyo
I watched the programme last night and I could not believe the FT guy was so "bearish"...
The Lombard lady ... well, I am an economist by training, and what she was really saying is "house prices will not crash because Lombard Research affordability model says something different"
Diana, I am not sure reality cares too much about what economists' models say...
Then the FT guy said something about "living in cookoo-land". I think that sums up the current UK situation better than any other comment (housing, state aids and benefits, currency, environmental policies, london transport, BA & Heathrow, and of course the currency)
Good weekend everybody!
6. Playground Of Lies said...
hahahahahahahahahahahaha you know people never seem to amaze me with there views and these people give us advice its a good thing that most Brits and I have said most Brits have common sense to see beyound the veil of lies I missed this feed yesterday but the guy is absolutely right people are living in coo coo land .I don’t know if anyone has seen this link but I think its worth having a look to wake up to the nightmare that people have created .knock knock ............s**t must have been a nightmare hahahahahahahaha NOT !
http://www.marketoracle.co.uk/Article3966.html
7. Letthemfall said...
I thought the Lombard comments were pretty lamentable. Out she came with the old chestnut about interest rates being much higher last time. No attempt to out this into the context of prices then and now or considerations of credit availability. Rather shameful for an "economist", but then "experts" are two-a-penny and their judgments often flimsy.
8. uncle tom said...
That Lombard lady really didn't know the full picture - classic example of not seeing the wood for the trees.
Not once in that piece did they mention the speculators - the BTL camp is going to get scared - very scared, and the urgent need for them to cut their losses is likely to turn a gentle decline into a rout, probably toward the end of this year.
One calculation I made suggested that by this autumn, the number of vacant possession 'entry level' properties coming onto the market could reach 85,000 per month, with fewer than 20,000 finding buyers - in other words, total market overload.
I also worked the sums for BTLers who try to ride out the storm - it really isn't pretty, and whether they want to or not, I reckon that the owners of around two thirds of the current million BTL's will find themselves compelled to sell. Those who do sit it out (mostly those who have only one or two properties) will build up such a deficit from bailing out the project that they will never recover their losses.
Incidentally, when the dust finally settles (after the market has crashed, rebounded and then stabilised), my prediction is that prices will settle at about 60% of present values (before adjusting for inflation) and that rents will settle at around 75% of current values. I also reckon that inflation over the next couple of decades will probably average around 5-6%, although there is a significant risk that we could see a period of runaway inflation first.
9. confused76 said...
UT,
very good comment "seeing wood..."
She was contraddicting herself "house prices to fall moderately because people not forced to sell, it is different now IRs are much below the early 90s", and "the real problem BoE has to address is the overheating of the economy"... so ehmmm that means IRs have to go up much much more... early 90s again? "No no, Lombard street has a model and reality must oblige"
how about next year UK = Iceland?
remember how perception changes very fast. Just 6 months ago all the economic pundits were predicting falling interest rates. They had forgotten inflation is a nasty beast. The UK has to digest a 3 fold appreciation of its housing stock in 10 years. that means prices of any goods have to go up 3 times over say twice that period. ... and state benefts and govt spending ... and the pound to go below parity with the euro.... is that what we want?
will any foreign investor buy UK gilts anymore? what will be the required yield of 10 year govt bonds?
Iceland Iceland!
10. tyrellcorporation said...
UT... 'I reckon that the owners of around two thirds of the current million BTL's will find themselves compelled to sell.'
Spot on UT and there's the 'forced selling' component the Lombard fox said was unlikely going to happen. Her 'models' also won't factor in arguably the most important aspect of the housing market; sentiment.
11. Greenbay said...
as an example...
one of my properties has a fixed rate 0f 5.19% for the next five years, i take £550 per month (council lease back) which leaves me £150 profit every month after costs, why on earth do i need to sell? i have many properties similar and many landlords are the same.. so why do you all see a big panic of people trying to sell??? dream on losers...another 5 years of failed predictions eh hahaha...
12. Bananaslip said...
House prices might fall to genuine affordability, lets say that 3.5 times the basic wage (not the so called average wage) the minimum wage is 5.52 which equates to about 11,500 per annum, 3.5 times = £40,250. A first time home for this low paid keyworker is now affordable. When the repossessions start the real problems begin because there is no safety net and no social housing, private landlords do not allow pets and some refuse children. Private rents are market driven aimed at the higher income earners or are in dis-repair and aimed at the vulnerable.The rental market is driven by greed and the tenant is unprotected not able to complain and can be given 2 months notice or even 4 weeks when informed by letter after 6 months tenancy. When families have been evicted and most families have pets, what are the local authority going to do with the dogs and cats etc, you can squeeze a family into one room at a B&B but what about the pets? What if thousands or 10's of thousands of families are booted out on to the streets. House prices are going to crash because the banks know they are over valued and mortgages will now reflect income, affordability and the bank will expect a good deposit to share the risk...hahahahohoho..
13. uncle tom said...
C76
I can see problems ahead on the Govt stock front, initially starting with a gentle asian sell-off of US treasuries - leading to too much stock and too few buyers, falling prices, and the realisation that no-one living outside the US should be holding this paper. A classic run could ensue.
Contagion is likely to be rapid, particularly to countries that also have a serious trade and budget deficits, such as the UK.
Iceland's situation is a bit unique - a tiny population and economy playing big number financial games. The party is getting decidedly ugly..
14. Wilee said...
Almost 20 minutes into the program the Lombard Lady says that for a HPC to happen you'd have to have either...
a. A rise in unemployment as might happen during a recession, or
b. Mortgage payments would have to be become unaffordable.
Regarding the latter, she then mention the age-old argument that mortgage rates remain way below way they were in the early 90's, lets say for sake of argument 5%-ish recently compared to almost 10% then. The thing that astounds me is she totally overlooks the lending multiples, so that yes, double-digit rates were far higher in themselves, but the average multiple then was probably around 3 - 3.5 x salary, whereas in recent years, borrowing 6, 7, 8 x salary is not unheard of, which is going to be just as painful to repay as a lesser amount at a higher rate... I'm just amazed at the short-sightedness of her argument.
15. inbreda said...
The trouble with economic models - as has been pointed out on this site - is that they seem to be in a constant state of development. To you and me that means they aint finished yet and probably aren't worth jack sht until they are. to economists and brainless city whizz-kids it means that they are truly dynamic, adapting to market environments (or similar crap).
As a result these models tend to be short term and overly simplistic. For house prices, for example, any model that consisted of nothing but the rule "next month house prices will do what they did last month" would have been approximately correct (in direction at least) nearly every single month for decades. Of course once the model has been a bit wrong for a few months (like the last 5 while prices have been dropping) it dynamically adapts and starts predicting never ending falls. If this (over-simplistic view) wasn't at least partially true, you would not have seen so many changes of opinion and prediction in so many economists over the last 6 months or so. We've gone from "house prices only ever go up", to "stable but no falls", to "small falls but no chance of a crash" to "extended falls but only a small chance of a crash". As I see it there is only one more opinion change for the clever economists to make then Kirsty can eat her hat, we can all get together for a knees-up, and the uk can get on with life.
16. Daringsneakybeaver said...
Yeah and also at the moment all the economists completely miss something ... it's not the INTEREST RATE that's killing people ... it's LEVERAGE. In the early 1990's you couldn't borrow 125% of the value of your home. Now however there are some streets in the North where 90% of the value of all the houses in that street is mortgaged. We don't need another ERM crisis (with rates going to 15% in a morning) this time around, people are just over-borrowed and now that house-prices have turned (remember how last year everyone was "convinced" that house prices would go up "forever" - such short memories) it only takes a small chink in the system to have a massive effect. If you've borrowed £100k you can weather a several % increase on your mortgage. But if you've borrowed £200k or £300k, the effect is clearly magnified and so we are in a situation now where a smaller change in rate (or mortgage availability) hurts people who have over-extended. Thing is, this credit crunch is NOT just "a small chink in the system", it's an event the magnitude of which is lost on most people, even those supposedly smart people in the financial world.
Every boom ends with everyone convinced it's never going to end. Remember the Nasdaq in 1999/2000 and how glassy-eyed everyone got about "The New Economy"? This housing thing is just the same thing. Just like Tokyo 1989 and Hong Kong 1998.
The thing that shocks me is it's not even 10 years since people did their conkers on technology stocks. Now they're doing their conkers on housing. Too many people still seem unable to learn how speculative fevers work.
The last housing downturn took 5 or more years to bottom out. I sold last year and am going to wait at least that long before considering getting back in.
Loan-to-Value ratios have already taken a step down, salary multipliers are coming down and may even go back to "good old fashioned" levels of 2x or 3x (i.e. not the idiocy of 7x joint salaries, interest only) and credit availability is contracting. This is deflationary.
And let's think about the other problem - commodity inflation. Rice jumped up 30% in a day this week. We have housing deflation with commodity inflation - the most toxic combination of all. Living costs more, and you are unable to fund it by gutting the value of your house in an equity withdrawl mortgage. That spells tough time, a recession for Mr and Mrs Average, maybe a depression of sorts like they had in Germany in the 90's, maybe something more serious like Japan.
For the moment the central banks are letting inflation ride. It's convenient to have inflation because it burns off the value of the debt in the system. At some point the CB's will step in and try and extinguish the inflation. Remember how Paul Volcker jacked rates up to 20%. The commentators in this piece haven't yet joined the dots that housing affordability is going to get slaughtered when rates start jacking up this time around. Yeah, a small fall in prices might help affordability for now, but that's a very one-dimensional comment.
17. Bananaslip said...
house prices are going down,down,down.
no safety net.
no social housing.
rip off private lanlords, 2 months notice if you complain about the poor standards.
squeeze families into one room at B&B's.
family pets have no where to live
Mortgages reflect true property value and real incomes.
high energy bills plus higher council tax(for doing what!) plus higher mortgage payments plus higher food bills plus higher water and sewerage bills plus rip off vehicle costs plus high inflation minus lower lower wage increases plus higher public transport costs and fewer services and more and more etc.
can anyone tell me something positive, perhaps education or the health service or the behaviour of our citizens is !!! No thats all bad news as well ! please let me know if I have missed something.
18. richc said...
Lombard's model of affordability is a joke -- it only looks at the current month's payment on a mortgage and ignores the full cost of the loan over the life of the mortgage. This is a basic, fundamental error that they're making and how they can be allowed to present their rubbish ideas on the BBC really makes you wonder.
In the early 90's interest rates did spike up to the mid-teens, but disposable incomes were also growing at 10%-20% per year. Lombard says nothing about this, as if it doesn't matter. You could take on a massive mortgage back in 1989-92, and it would be whittled away to nothing through wage inflation after a few years. Wages are now growing in very low single digits (real disposable income growth has actually been negative lately) so massive mortgages are no longer being inflated away. FTBs are selling themselves into a lifetime of debt slavery if they buy a house at current prices. If you look at the real cost of a mortgage over the life of a loan, and take into account the effects of wage growth and interest rates, homebuyers are committing a much higher percentage of their incomes to servicing a mortgage than they ever have before. The ratio of total cost of a loan to total average income over the life of the loan is now almost double what it was in the early 90's. The average FTB might not be all that financially literate, but they're not completely stupid and this is clearly having an effect on people's willingness to buy into the housing ladder.
19. mark wadsworth said...
Good summary by richc.
20. little professor said...
iPlayer link - better quality:
http://www.bbc.co.uk/iplayer/page/item/b009ny9v.shtml
21. Daringsneakybeaver said...
richc - absolutely right.
Feudalism has been replaced with indebtedness. The best way to keep the population under control is to make sure they have a big debt to pay off, and everyone swallowed it whole on the grounds that "house prices go up forever" and celeb culture persuaded them that everyone can live a fantasy lifestyle. The sheep have become lemmings!
22. paul said...
Ah yes, the forced sales component.
It won't be needed this time round - quite right. Instead we have fickle 'investors' keen to take flight at the first sign of things smelling off. This, in turn floods the market with affordable properties, accelerating the decline.
(I concede that you are not Stuart Law from Da Assetz Boyz, little professor - apologies.)
23. uncle tom said...
inbreda,
While I don't think it is entirely true today, it is a fact that many years ago, someone compared the official UK met office weather forecasts with a forecast that always said "tomorrow will be exactly the same as today"
- guess which one proved more accurate?
RichC is correct - the problem with economic models is that the ground rules evolve. The huge flaw with some of these 'then and now' comparisons, is the fact that once upon a time, if you found that you had overstretched yourself when taking out a mortgage, you knew that a year down the line you would be earning significantly more, and a year after that, more still. You had an escape route.
Now, if you underestimate your living costs (which many do) you can find yourself in a debt spiral from which it can be very hard to escape.
24. Fed Up said...
Good analysis uncle tom. Added factors of Sterling's fall are that overseas investors - the Irish BTLs in Liverpool for example - will pull out, as will increasing numbers of Polish migrant workers, so rental prices will continue to fall.
25. george monsoon said...
definitely a blinkered view by the Lombard lady.. but I bet she sounds great in bed!!
26. malct said...
good post yoyo1 - but
I watched a few minuites of this and gave up it was so painful.
Apart from the FT bloke (4. confused76 said...I watched the programme last night and I could not believe the FT guy was so "bearish"... ) these people are cooked - absolutely cooked - not just over cooked - burnt. They are acting out a fantasy.
why bother breathing if you are so cooked? not you, them.
we all need to do a lot of homework.
27. quiet guy said...
I liked the bit when the estate agent complained about "hype you get in the press" scaring off buyers - absolutely priceless.
Later, the FT representative said: "Anyone who says that they can absolutely predict what is going to happen to house prices is, I think, living in cloud cuckoo land." Perhaps that should give us all pause for thought?
28. sold 2 rent 1 said...
Here is the graph she is talking about (LSR Housing affordability graph)
The current value of the index is around 81
So it is crash time if we compare to 1975 but not if we compare to 1990s.
Why was 81 sufficient for a crash in 1975 but not in 1990?
To answer this you need to understand secular cycles. Secular cycles in housing work slightly differently to secular cycles in stocks.
Essentially we are at the start of the pattern that played out between 1974 and 1992.
So can we expect a 3 crashes of 2010, 2019 and 2028? Maybe not.
A year ago I would have said yes but now I think things will be condensed into just a few short years.
As interest rates are cut, unemployment will rocket, as we enter a deflation v hyperinflation battle.
So the 3 troughs of 1976 1982 and 1992 could replay out in 2009, 2010 and 2011.
where 2011 is the bottom of the cycle (as defined by Martin Armstrong's PI cycle low of 2011)
What I am saying is the crash will last 3-4 years where affordability ends up at 1992 levels. There will be no real recovery between the phases but small dead cat bounces where the index looks like it is improving (as IRs are cut) but then as food/energy prices rise and unemployment rises the index heads down again sharply.
This all fits in with Calleman/Lungold's model of exponential change going vertical as we head into 2011/2012
29. sold 2 rent 1 said...
Some more thoughts.
Basically by 2011 IRs will be near zero.
If the bailout strategy continues then it is hyperinflation and the end of our fiat currency - end of money
If the bailout strategy is stopped then the money supply will implode and we have a collapse of all financial institutions - also end of money.
Don't worry it is not all that bad. We are moving from an age of materialism to an age of spiritualism whereby we reach global enlightenment and will be much happier people.
30. new user 2007 said...
Greenbay...
But you said you are in a constant mode of buying. This means you never have a high level of equity in each property. You now mention you have properties with 5 year fixes. BUT you also say you are seeing this period as one of buying opprtunities. How does that tie in with someone who has enough equity to not end up on very high interest rates on the additional 1m properties you are apparently buying up as we speak?
UT...
Good points but please note that there are 1mn BTL mortgages but around 2mn BTL properties. Half of those were bought from the second half of 2005 and most of these later people are subsidising their tenants and used capital appreciation to offset. Now they are seeing some rise in rents but many are seeing even larger rises in mortgage payments (those who took out 2 and 3 years fixes) and seeing losses on the capital side.
That means there are even more houses about to enter the market than you suggest, and probably why Greenbay is panicked. He is about to see his capital on his 1mn properties collapse:)
31. new user 2007 said...
p.s. speaking of clever models. Is she using the same ones that gauranteed that SIVs, conduits, CDOs etc were 100% secure and accurate? Or is her model even more advanced that those?
Or is she related to Greenbay and is either panicked or just mad (on top of being a pathological lier:)?